Tag Archives: GDP

If there are limits to growth and therefore how far our economies can grow what can be done about it? Economist Herman Daly has a possible answer in the Steady State Model.

“An economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance ‘throughput’, that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.”

What Daly is describing is an economy that has reached a stable population level and a low-level of consumption. For most of human history our struggle has been about getting enough resources to survive but now we have surpassed that need. We have more than enough for everyone and are reaching the point where continuing to produce is a danger to us all.

The Steady State would be smaller in size, consumption and environmental impact as it would need less to sustain itself. It’s as much a new form of economics as it is a new way of evaluating progress and value. GDP would no longer be an adequate measurement as production and consumption are not the pillars of progress in the Steady State.

The massive accumulation of wealth needn’t be the focus of a society and in face the Steady State requires that it not be. Money could exist but massive accumulation tends to promote inequality which breeds an unstable society.

Achieving a steady state economy requires adherence to four basic rules or system principles:

Maintain the health of ecosystems and the life-support services they provide.

Extract renewable resources like fish and timber at a rate no faster than they can be regenerated.

Consume non-renewable resources like fossil fuels and minerals at a rate no faster than they can be replaced by the discovery of renewable substitutes.

Deposit wastes in the environment at a rate no faster than they can be safely assimilated.

The Steady State is a simple concept but politically is extremely difficult. We’re not just discussing a policy change but instead a changing of principles and values.

With President Obama’s new green policy that seeks to limit carbon emissions there has been and will continue to be heated discussions about the impact this law will have one economic growth in the U.S.

Inspired by these debates the next several posts will discuss the limits of growth, steady state economics, and how we measure growth.

GDP (gross domestic product) is a measure of economic activity which is narrowly understood however this does not stop politicians and policy makers from making welfare decisions and comparisons based on this data. The basic argument goes like this: GDP is a proxy measurement of how much people can consume and consumption is a proxy measurement of well-being. We therefore use GDP per capita for comparing welfare between nations and an increase in GDP as an indicator of social progress within a society. This is a compelling case and we are used to hearing this from figures in authority and the media but it is misleading to think that a higher GDP leads to better social welfare.

GDP is computed as the sum of all end-use goods and services made in an economy during a period of time weighted by their market prices. Too illustrate if Pakistan began building war drones and hired many people for this skilled manufacturing their GDP would increase. However, would this necessarily make the people of Pakistan better off especially considering that many of those drones will be used on other Pakistanis in the northern region? Simply put this proxy measure does not measure happiness or well-being it only measures what we can consume. From that definition its GDP is a pretty narrow measure of our daily lives and should be taken to be just that…limited.

According to Richard Easterlin people do not become happier when they become richer and this has become known as the Easterlin Paradox. There are many possibilities for why this is true including the idea that a threshold of affluence vs leisure time exists. If you do not have time to enjoy the fruits of your labor will they truly make you happier? Has this new wealth increased your well-being? Or as Fred Hirsch suggests there could be a correlation between increasing affluence and increasing competition for “positional goods” that can be bought by anyone but not always everyone. This idea creates a consistent need to buy more and more.

Furthermore GDP does not take into account the limits of natural capital. Since natural ecosystems provide resources like coal and oil and there are limits to them both in quantity and in negative impact these must be considered in the overall measurement. This is called “greening GDP,” where we subtract the negative impacts from the total GDP. For instance the cost of the BP oil spill in man hours, clean up costs, oil revenues lost and negative effect on wildlife which in turn affects the lives of the locals would all be subtracted from the GDP of the U.S.

Even by measuring some negative outcomes of a consumer based economy as mentioned above GDP does not give us a clear look at well-being. There have been several experiments that have attempted to tackle that issue such as the Gross National Happiness used in Bhutan. While this one is highly qualitative and has some issues it is a thoughtful approach by a government to measure their people’s well-being. Another is the Genuine Progress Indicator (GPI) which uses a long list of indicators to measure well-being ranging from air quality, crime, leisure time and personal wealth. GPI also boils all those indicators into one neat number which economists love.

As an economist I’m not saying that we should abandon GDP altogether only that it should be taken as a small part of a larger picture. A measure of a small piece in a large puzzle that is human well-being. With that in mind, when politicians threaten to block legislation meant to protect the environment because it could hurt our GDP you should ask whether a high GDP is worth it. In an economy where we have been taught to consume, GDP not only doesn’t reflect well-being…it could harm it.

Policy makers in the U.S. love to talk about the burden of debts that they will leave behind for future generations. One example often cited by debt hawks a family that has borrowed too large a mortgage and will have a hard time making the payments. While it certainly paints strong visual, its wrong in two ways.

First, families have to pay back their debt–governments do not. They need to make sure that the debt grows slower than their tax base. The U.S. never repaid the debt from World War II, the debt just became irrelevant as the economy continued to grow and grow. What policy makers need to focus on is not the debt, but strengthening the tax base and that includes getting people back to work…more likely by government driven Keynesian policies.

Second, an over borrowed family owes money to someone else, however the US debt is largely owed to the U.S. This was clearly true of the debt incurred by winning WWII, which was much larger as a percentage of GDP, but that debt was owned by taxpayers in the form of war bonds. That debt didn’t make the U.S. poorer in fact the post war generation experienced the greatest economic boom in wages and living standards in the nation’s history.

In the wake of the debt debates austerity is now in vogue and at stake is the U.S. economic future. A part of the austerity fashion wave is the idea of generational justice. It is said that the U.S. is passing on its children and grandchildren and as the debts become payable, future generations will be burdened by rising interest rates and lower living standards.

The economics of this are misleading. The well-being of children and grandchildren in 2023 and 2033 is not a function of debt reduction but instead about putting economic growth back on track. If The U.S. reduces debt by cutting social spending and “tightening its belt” the economy will fall stagnate and lower wages. The debt will out pace growth and there will be little money to invest in education, research and job-training.

Real generational justice would entail making sure that wages are adjusted for inflation, college loans rates are reduced and investment in growing markets needs to be maintained. The next generation can and will produce for the U.S., they just want the same opportunities their parents enjoyed.